Beginning and amateur traders typically allocate risk based on their how they feel about their recent string of trades instead of relying on a preplanned position sizing model. They tend to trade way too big after a recent string of winners and often get caught on the wrong side of the market when they are most aggressive, which in turn leads to large losses. These amateaur trading mistakes related to position sizing should be dealt swiftly if you want to stay in the game for any reasonable amount of time. Trade management is possibly one of the hardest aspects of trading.
And the reason for this is that the moment that you enter a trade, all of your objectively will go out the window. You will become biased and begin to see what you want to see and your subconscious mind will filter out things that are not in line with your trade bias. This may seem hard to believe for some, but it is a matter of fact. When you are in a trade, it feels uncomfortable to do nothing.
But many times, doing nothing is the best thing to do.
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We have a desire to constantly monitor, adjust, and micro mange the position to the point where it becomes counterproductive. You have to try to overcome these trade management mistakes. And one of the best ways of doing that is by using a Set and Forget type of trade management policy. Within this trade management style, you do all your analysis prior to execution, when you are the most unbiased. You determine and set your stop loss and profit target in the market the very moment that you enter the position. And then you let the market do its thing.
There is nothing more you can or should do about that open position. Instead take your dog for a walk, go to the Gym, or look for the next trade setup.
One of the things that we all value in our professional and personal life is the ability to have choices. Having choices is a wonderful thing in most parts of our lives, but in trading, it can sometimes hold us back from realizing our full potential. What do I mean by that? Well quite simply, having the freedom of choice in terms of trading strategies and systems can often lead us down an endless path for perfection.
You know what I mean, the search for that holy grail trading system that will make us rich beyond our wildest expectations. If you have been around this game for any length of time, you know that there is no Holy Grail trading system out there. The sooner that novice traders realize this, the faster they can get to the business of trading. Successful traders have a defined edge and they apply that edge in the market whenever the opportunity arises.
They know that they will make mistakes in trading, and that there will be losing trades, even a string of them, but that does not deter them from sticking to their strategy. Beginning traders should also focus on picking a methodology that suits their own personality and learn everything about it. Then they should apply the strategy in the market, and give it enough time for the odds to play out.
Only once they have given the particular trade methodology an honest go, should they consider pulling the plug and moving on to some other strategy. Any successful business owner will tell you that keeping and maintaining good records is essential. Not only is it required for tax purposes, but just as importantly, good record keeping allows a business owner to know where revenue and expenses are coming from. They can use that information to cut unnecessary expenses and increase customer value to attain a healthier bottom line.
Trading is not too much different if you think about it. As a trader, our revenues are profits from winning trades, and our primary expenses are our losses from losing trades. If we do not have a detailed journal of our thought process and events surrounding our trades, how can we ever expect to boost our results? In short, we cannot. Therefore, it is essential that traders keep a trading diary, and review it on a regular basis. This is probably one of the best beginner trading tips that I can offer.
Take a look at what is working and do more of that. At the same time, review what is not working and try to cut that out of your trading plan.
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If you are serious about trading and are treating it as a real business and not just some side hobby, you have to start by committing to having a personal trading journal. And if you find yourself leading astray from this routine, remember the adage — What gets measured, gets improved. Averaging losing trades has to be the biggest cardinal sin of them all, but it is one that almost every trader has made at some point in their careers.
Many traders are enticed by averaging losers, because on the surface it almost seems like a sure bet. You decide that you will double your bet size every time you lose, and as a result you should come out ahead. Here is what that scenario would look like after 8 consecutive losses, which is common both in roulette and trading:.
Though this is a rather simplified example, it should serve to show you that averaging losers is a horrible strategy in roulette and an even worse strategy in the markets. Eventually, sooner or later, you are asking to get your account blown up. Averaging losing trades and trading too much size is without a doubt the biggest reasons why many newbies fail at trading.
One of the most common mistakes that beginning traders make is that tend to equate losses with failure. And this is especially true for those that are accomplished in their own profession such as Doctors, Lawyers, Engineers and other highly successful individuals. They are used to getting things right and achieving their goals. And so, they bring this mentality to the markets and it tends to cause havoc on their psyche. First and foremost, anyone that is entering the trading world, should realize losses are a natural part of trading. They must accept this and believe this in their core being in order truly overcome the negative emotions associated with losing trades.
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Professional traders, on the other hand, have come to realize that trading is a game of probabilities and that no single trade or even a string of trades has much meaning in the whole scheme of things. So, a winning trade or a losing trade does not affect their emotional makeup. Amateur traders are much more effected by recency bias, meaning their mood and actions in the market are heavily influenced by their most recent trade performance.
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Some strategies yield a high percentage of small winning trades, others a low percentage of big winners. For some strategies you only have to set-up new positions about once a week, others are meant for intense intra-day trading. This is why Forex for Ambitious Beginners has a section on self-assessment, to help you determine what kind of trading personality you have.
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Self-assessment will help you find the trading strategy that's right for you, so that you can create working set-ups. A set-up is basically a collection of conditions that have to be met before a trade is opened and closed. Remember that one of the most important parts of your trading plan is your exit strategy.
Setting and keeping a stop loss and profit target is often what makes the difference between being a successful forex trader and a losing one, so be sure to spend time on this. Another important part of your trading plan is evalution. You can't expect your trading plan to be perfect from the get go, in fact you can't expect it to be perfect ever.
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You need to regularly evaluate it, in order to find and deal with leaks and weak spots, to improve your Expected Value. So keep records of your trading. For a single position, you could note things like: what currency pair, what was the set-up, entry, exit, profit.